Fuel and travel costs are pushing prices up again
Thursday 5 November 2026
Inflation has risen to 3.1%, meaning everyday spending is getting more expensive just as household budgets are already under pressure.
The tax system rewards the wrong things
How we tax work, wealth and investment shapes who pays and what gets rewarded — with consequences for fairness and productive enterprise.
In a nutshell
- How much tax you pay depends not only on how much money you receive, but on what form it takes. Pay from a job is taxed more heavily than the same amount received as investment income, as profit from selling assets, or as an inheritance. [1]
- The gaps can be large. A 2020 study of tax records found that people receiving £10 million a year paid an average rate of 21%, less than someone on a middle salary. [2] Council tax in England is still based on 1991 house values. [3] And the largest estates pay a lower rate of inheritance tax than medium-sized ones. [4]
- It matters for fairness, because people with similar means can pay very different amounts. It also matters for the economy: the Institute for Fiscal Studies says the system discourages employment, investment and risk-taking. [1] But the highest earners already pay a large share of income tax [5], and raising rates without redesigning the taxes could do harm of its own. [6]
The basics
This page is about the rules: how different kinds of income and wealth are taxed, and what that encourages. Who owns what is covered on the wealth page. Tax rules change at most Budgets, and this page describes the position in October 2026.
Pay from work
Wages and salaries are subject to income tax and to National Insurance. The employer pays National Insurance as well, for each person it employs. [7]
Investment income
Dividends, interest and rent are subject to income tax, but not to National Insurance. [1] Dividends have their own, lower rates. [8]
Capital gains
The profit when something such as shares or a second home is sold for more than it cost. It is taxed separately, at rates that are almost always lower than those on income. [6] Gains on a main home are exempt.
Company profits
Companies pay corporation tax on their profits. Dividends are paid to owners out of what is left. [7]
Property
Council tax is paid every year by households. Stamp duty, or its Scottish and Welsh equivalent, is paid when a home is bought. [9]
Inheritance
Inheritance tax is charged on what people leave when they die, above a tax-free amount. There are reliefs for farms, businesses and some other assets. [4]
Same money, different tax
A simple test of a tax system is whether two people who receive the same amount pay about the same tax. In the UK the answer often depends on the label attached to the money: salary, dividend, capital gain or inheritance. Researchers at the Institute for Fiscal Studies argue that this part of the system is “not fit for purpose”. [1]
How big is the problem?
No single number captures it, so it helps to look at several.
Work carries an extra tax
Earnings from a job bear National Insurance as well as income tax, and the employer pays National Insurance too. Other kinds of income do not. The Institute for Fiscal Studies says this is the main reason employment is taxed more heavily than other ways of making the same money. [1]
A few people make most of the gains
Fewer than 1% of the people who pay capital gains tax, those with gains of £5 million or more, accounted for 40% of the tax in 2023–24 [10] and 45% in 2024–25. [11]
The number of people who pay the tax at all is about 1% of the number who pay income tax. [10]
Some very high incomes face low rates
A 2020 study of anonymised tax records found that people receiving £10 million paid an average rate of 21%. One in ten of those receiving over £1 million paid 11% or less, a lower rate than someone earning £15,000. The main reason was lower tax rates on dividends and capital gains. [2]
Some of those rates have been raised since.
Bigger estates, lower rates
In 2024 the headline rate of inheritance tax was 40%. But the rate actually paid peaked at 25% for estates worth £3 million to £7.5 million, and fell to 17% for estates of £10 million or more, because reliefs are used most by the biggest estates. [4]
A property tax stuck in 1991
Council tax bands in England are still based on what homes were worth in April 1991. [3] Since then, values have risen about twice as much in London as in the North East. The Institute for Fiscal Studies calls the tax out of date and highly regressive, meaning it takes a bigger share of the value of cheaper homes. [9]
More wealth, no more tax on it
Household wealth has more than doubled relative to national income over the past half-century. The Resolution Foundation found that those gains have not shown up in tax revenues. [12]
Not every measure points the same way
- The top already pays a large share. The top 1% of income tax payers are projected to pay 26.6% of all income tax in 2026–27. [5] Most of that comes from highly paid employees who pay close to the full rate. [2]
- Company profits are taxed before dividends are paid. A fair comparison adds corporation tax to the tax on dividends. On that basis the Institute for Fiscal Studies still finds employment the most heavily taxed [7], mainly because of employers' National Insurance. [1]
- The UK already raises a lot from property and wealth. The Institute of Economic Affairs, a free-market think tank, calculates that the UK raises more from wealth-related taxes, as a share of the economy, than any other country in the OECD group of richer nations. [13]
- The gaps have been narrowing. The main rate of capital gains tax was raised from 20% to 24% at the autumn 2024 Budget. [14] Tax rates on dividends rose in April 2026, and rates on savings and rental income are due to rise in April 2027. [8] Inheritance tax reliefs for farms and businesses were reformed from April 2026. [15]
- Other countries do the same. Most governments tax capital gains at lower rates than income. [6]
- Lower rates have a purpose. They are meant to encourage saving, investment and enterprise. The Institute for Fiscal Studies thinks they are poorly targeted at that aim [1], but also that simply raising rates would weaken the incentive to save and invest. [6]
So the picture is mixed. Few experts defend the way the system treats different kinds of income. But the top pays a great deal, the gaps are smaller than they were, and how to close them matters as much as whether to.
Example
Asha and Rob each receive £60,000 this year.
- Asha is a hospital pharmacist. All of her money is salary. She pays income tax and National Insurance on it, and her employer pays National Insurance on top.
- Rob sells shares he bought some years ago, at a £60,000 profit. He pays capital gains tax, at a lower rate than Asha's income tax, and no National Insurance. If he had kept the shares until he died, no capital gains tax would ever have been paid on that profit.
Both received the same amount before tax. Asha keeps less of it, and her employer has paid National Insurance on top. The difference isn't how much they received. It's what the tax system calls it.
How did we get here?
No one designed the system this way. It built up over decades, one decision at a time, under governments of both main parties.
-
National Insurance became a second tax on work alone
What happened
National Insurance is charged on earnings, and employers pay it on the salaries of their staff. It is not charged on other kinds of income. [1]
Why it matters
It makes employing someone more expensive than other ways of getting the same work done, and it means the same income is taxed differently depending on where it comes from. That discourages employment in a way it does not discourage other ways of making money. [7]
What the evidence shows
The Institute for Fiscal Studies finds that someone doing the same work for the same money pays less tax if they are self-employed or work through their own company. It says those lower rates are not justified by differences in benefits or employment rights, and are poorly targeted at encouraging investment. [16]
The gap has narrowed a little. Tax rates on dividends rose in April 2026, and those on savings and rental income are due to rise in April 2027. [8]
-
Capital gains were taxed more lightly than income
What happened
Tax rates on capital gains vary by type of asset and are almost always lower than tax rates on income. Gains are also wiped out for tax purposes when the owner dies: whoever inherits is treated as if they had bought the asset at its value on that day. [6]
Why it matters
People who can take their reward as a capital gain pay less than people paid a salary. And anyone sitting on a large gain has a reason to hold on to the asset until death, even if the money could be put to better use elsewhere.
What the evidence shows
Almost two-thirds of taxable gains each year are made by people realising gains of over £1 million. [1] The Institute for Fiscal Studies says the design of the tax reduces productivity and economic growth, by discouraging saving, investment and risk-taking and by keeping capital away from its most productive use. [6]
The main rate was raised from 20% to 24% at the autumn 2024 Budget. [14]
-
Property taxes were left to go stale
What happened
Homes in England have not been revalued for council tax since the tax began. Wales has revalued. [3] In 2024 the Conservatives pledged not to revalue. [9] The Labour government has announced an extra charge on homes worth £2 million or more in England, from April 2028. [8]
Why it matters
Bills bear less and less relation to what homes are worth, and fall relatively lightly on the most valuable ones. Stamp duty, meanwhile, taxes people for moving.
What the evidence shows
The Institute for Fiscal Studies calls stamp duty one of the most economically damaging taxes, because it raises the cost of moving and gums up both the housing market and the jobs market. [9]
It estimates that if council tax were proportional to up-to-date values, average bills would fall by more than 20% across most of the North and Midlands, and rise in London and nearby commuter areas. [3]
-
Inheritance tax filled up with reliefs
What happened
Inheritance tax has long had special treatment for farms, family businesses and some other assets. These reliefs are used most by the biggest estates. [4]
Why it matters
A tax with a high headline rate and generous reliefs falls hardest on people whose wealth is in ordinary forms, such as a house and savings, and lightest on those who can arrange their wealth to qualify.
What the evidence shows
In 2024 the effective tax rate peaked at 25% for estates of £3 million to £7.5 million and fell to 17% for those of £10 million or more. [4] The government accepts that the reliefs contribute to the very largest estates paying lower average rates than smaller ones, and reformed them from April 2026. [15]
-
Thresholds were frozen while pay rose
What happened
The income levels at which each rate of income tax starts have been frozen in cash terms for several years. At the autumn 2025 Budget the freeze was extended to April 2031. [8]
Why it matters
As pay rises with prices, more of it crosses each threshold. This fiscal drag raises tax on earnings without any rate being changed.
What the evidence shows
The number of people paying income tax is projected to rise from 36.7 million in 2023–24 to 40.8 million in 2026–27. The number paying the higher rate is projected to rise by a third over the same period, to 7.7 million. [5]
Who is affected most?
The people who lose out are those with the fewest choices about how their income or wealth is arranged.
Employees
Someone doing the same work for the same money pays more tax as an employee than as a self-employed person or through their own company. [16]
People who live on earnings alone
Most people have no capital gains to speak of. The number who pay capital gains tax is about 1% of the number who pay income tax. [10]
Earners pulled into higher bands
With thresholds frozen, a projected 7.7 million people will pay higher-rate income tax in 2026–27, a third more than three years earlier. [5]
Owners of cheaper homes
Council tax takes a bigger share of the value of low-priced homes than of expensive ones. [9] Households across most of the North and Midlands would pay less under a tax proportional to current values. [3]
The moderately wealthy
Estates of a few million pounds have paid a higher rate of inheritance tax than estates of £10 million or more. [4]
People who need to move
Stamp duty adds to the cost of moving home, whether for a job, a growing family or to downsize. [9]
Why is it hard to fix?
Most tax experts agree the current design is poor. The difficulty is that every fix creates losers, and badly designed fixes can make things worse.
-
People change what they do when rates change
The problem
Capital gains are taxed only when an asset is sold, and the owner chooses when. In 2024–25, with a rate rise widely expected, the gains reported to HMRC rose by 82% as people brought sales forward. [11] Because so much of the tax comes from so few people, some advisers argue that a large rate rise might raise little extra money. [14]
A possible fix
Change what is taxed, not only the rate. The Institute for Fiscal Studies suggests ending the rule that wipes out gains at death, so there is less reason to hold on, and taxing people who leave the UK on gains built up while they lived here. [6]
-
Higher taxes on gains can deter investment
The problem
Capital gains tax is charged on the whole rise in an asset's price, including the part that is only inflation. Losses are not treated as generously as profits, which discourages risk-taking. The Institute for Fiscal Studies warns that raising rates without fixing these flaws would weaken the incentive to save and invest. [6]
A possible fix
Raise rates towards those on income, but at the same time give fuller allowances for the money people invest, or tax only the gain above inflation. [1] This is more complicated than a simple rate change.
-
Property tax reform creates visible losers
The problem
Bringing council tax up to date would cut bills in much of the North and Midlands and raise them in London and nearby commuter areas. [3] Those facing higher bills would notice at once. No government of either main party has revalued homes in England since 1991. [9]
A possible fix
The Institute for Fiscal Studies suggests pairing the two reforms: abolish stamp duty, and raise the same money from a council tax based on current values. [9] Changes could be phased in over several years.
-
Every relief has its defenders
The problem
Reliefs usually exist for a reason. Those in inheritance tax are defended as a way to stop farms and family firms being broken up when the owner dies. But 90% of business assets are passed on in estates worth more than £2 million, so most of the benefit goes to the largest estates. [4]
A possible fix
Limit a relief instead of abolishing it. From April 2026 the government reformed the reliefs for farms and businesses, and expected almost three-quarters of estates claiming the farm relief to be unaffected. [15] It is too early to judge the results.
Where people disagree
The facts above are mostly agreed. How much they matter, and what to do about them, is not.
It's a serious problem
- Employment is taxed more heavily than other ways of making the same money, mainly because of National Insurance. [1]
- Lower rates on capital gains overwhelmingly benefit the wealthiest. Almost two-thirds of taxable gains are made by people realising more than £1 million in a year. [1]
- A study of tax records found people receiving £10 million paid an average rate of 21%. [2]
- The largest estates have paid a lower rate of inheritance tax than medium-sized ones. [4]
- Council tax in England rests on 1991 values, and stamp duty is among the most economically damaging taxes. [9]
- The design of capital gains tax reduces productivity and growth, according to the Institute for Fiscal Studies. [6]
It's overstated, or has other causes
- The top 1% of income tax payers are projected to pay 26.6% of all income tax in 2026–27. [5]
- Most of the highest earners are employees who pay close to the full rate. The very low rates apply to a minority. [2]
- The UK raises more from wealth-related taxes, as a share of the economy, than any other OECD country, on the Institute of Economic Affairs' calculation. [13]
- Rates on gains, dividends, savings and rent have been raised since 2024 [14] [8], and inheritance tax reliefs reformed. [15]
- Raising rates can backfire. Reported gains jumped by 82% in 2024–25 as investors sold ahead of expected rises [11], and higher rates on a flawed tax would weaken the incentive to save and invest. [6]
On balance
The UK taxes money earned by working more heavily than money made from owning things, taxes homes on values from 1991, and lets the biggest estates pay lower rates than smaller ones. Few tax experts defend any of that as a design.
But the picture is less one-sided than the title suggests. The highest earners pay a large share of income tax, most of them at close to the full rate. Several of the gaps have been narrowed since 2024. And lower rates on investment were not an accident: they were meant to encourage saving and enterprise, even if they do it poorly.
The real disagreement is about the remedy. Some would simply raise rates on wealth and investment. Others, including the Institute for Fiscal Studies, argue that rates and the design of each tax have to change together, or the result could be less investment and little extra revenue. For the options, see Taxing wealth and income fairly.
Sources and further reading
These sources support the facts and examples on this page. They explain the evidence, but they don't all share the same view of how serious the problem is or what should be done about it.
- Institute for Fiscal Studies: Tax system discourages employment, investment and risk-taking. It needs reform (2021) — why employment is taxed more heavily than other income, who benefits from lower rates on capital gains, and options for aligning rates.
- London School of Economics: Reform UK tax to rebuild post-COVID-19 public finances (2020) — research by Arun Advani and Andy Summers, using anonymised tax records, on the rates of tax actually paid at very high incomes. Predates later rate rises.
- Institute for Fiscal Studies: Revaluation and reform – bringing council tax in England into the 21st century (2020) — the 1991 valuations, the position in Wales, and how bills would change around England under a tax based on current values.
- Institute for Fiscal Studies: Raising revenue from closing inheritance tax loopholes (2024) — the rate of inheritance tax actually paid by estates of different sizes, and who uses the reliefs.
- HM Revenue and Customs: Income Tax liabilities statistics, tax year 2023 to 2024 to tax year 2026 to 2027 – summary statistics (2026) — the number of income tax payers at each rate and the share of income tax paid by the top 1%. Figures for 2026–27 are projections.
- Institute for Fiscal Studies: Capital gains tax reform (2024) — how capital gains are taxed, the effects on saving, investment and risk-taking, the rule that wipes out gains at death, and why rates and design need to change together.
- Institute for Fiscal Studies TaxLab: Overall marginal tax rates by income type, 2021–22 (2021) — overall tax rates on employment, self-employment, dividends and capital gains, counting employers' National Insurance and corporation tax.
- BDO: Budget 2025 (2025) — an accountancy firm's summary of the November 2025 Budget, including the threshold freeze to 2031, higher rates on dividends, savings and property income, and the council tax surcharge on high-value homes.
- Institute for Fiscal Studies: Council tax needs urgent reform, not being frozen in time in 1991 (2024) — why council tax is out of date and regressive, the economic cost of stamp duty, and the case for reforming the two together.
- HM Revenue and Customs: Capital Gains Tax statistics – commentary (updated annually) — how many people pay capital gains tax, and how much of it comes from those with the largest gains.
- Spear's: Wealthy investors drive record £24.2bn Capital Gains Tax bill (2026) — a report of HMRC's 2024–25 figures, including the rise in reported gains ahead of expected rate changes.
- Resolution Foundation: Wealth check – what the new Government needs to know about household wealth (2024) — the growth of household wealth relative to national income, compared with revenue from wealth-related taxes.
- Institute of Economic Affairs: Britain raises more tax from wealth than any other OECD country (2026) — the argument that the UK already taxes property and wealth heavily by international standards.
- RSM UK: The danger of raising capital gains tax rates (2025) — the 2024 rise in the main rate, and an accountancy firm's argument that large rate rises may not raise much revenue.
- HM Treasury and HM Revenue and Customs: Summary of reforms to agricultural property relief and business property relief (2024) — the changes to inheritance tax reliefs for farms and businesses from April 2026, and the government's reasons.
- Institute for Fiscal Studies TaxLab: Tax penalty on employment (2021) — the tax paid on the same income by an employee, a self-employed person and a company owner-manager.
Keep in the loop
News
Highlights from about the UK economy, the UK government and the UK public sector.
Mortgage relief will have to wait a little longer
Wednesday 4 November 2026
Interest rates are staying at 3.75%, so households with mortgages and other borrowing may have to wait longer for costs to come down.
Energy bills are going up as winter approaches
Wednesday 4 November 2026
A higher energy price cap means many households will be paying more to heat and power their homes during the colder months.
Guides and insights
Analysis
Clear, accessible analysis of the economic issues shaping everyday life
Living standards
What does a day’s work buy?
Comparing the cost of everyday life across generations, from bread and beer to buying a home.
Food & prices
The journey behind your grocery bill
How farming, energy, transport and supermarket competition shape the price on the shelf.
Prices & inflation
Inflation is falling. What happens next?
What slower price rises mean for wages, purchasing power and economic recovery.
Shared prosperity
What would shared prosperity look like?
Beyond GDP: how we could measure economic success through security, opportunity and living standards.
Let's work together
Get in touch
We're looking to work with individuals and organisations who can contribute funding, expertise, data, technology, or strategic connections to help build better economic tools and research.